Wednesday, April 29, 2015

Microsoft, symbol MSFT, has been a part of my portfolio since it sunk to under $30 in late 2012. I loaded up and have unwound my position by selling covered calls most of which have been called away.

Several $50 covered calls have expired and I am willing to try that strategy again with my remaining shares of MSFT.

MSFT July $50 strike price analysis

I prepared two tables below that show the gain from selling calls on those final shares if they are called away. Also if they are not called away, I will supplement the dividend income (which is only about 2.5%) with covered call income.

The second table shows that to do this trade today, using today's cost basis, is not very lucrative. However, that trade would deliver nearly a five percent gain in just 79 days if the stock is called away. If it is not assigned, then you get a dividend stock upon which you can sell future covered calls.

Consider this strategy for positions that have appreciated and provide minimal dividend yields but have covered call potential. TheMoneyMadam

Sunday, April 26, 2015

I
must invest some of the cash liberated when calls expired last week.

I usually have about 10 percent of my
stocks on which I sold covered calls, called away.

Too much cash is not wiseIt is not wise to have too much cash around
so I am looking for Dividend Machines to add to my portfolio to replace stocks
like Microchip Technology, Darden restaurants, Pitney Bowes (yes I finally
found a buyer for that stock.)

I
found seven stocks that yield at least 3.5% with dividend growth averaging
greater than four percent per year for the past five years.Each stock has earnings greater than the
dividend over the past four quarters, and each has a D/E ratio of 1 or less or
equal to industry standard.

As
you know for the purposes of adding to the 2015 Dividend Machine Portfolio, I
use no other criteria.For my own portfolio,
however, I might not want to add more energy or more utilities or more
tech.Only you can decide if you want
to use more criteria, than I use for Dividend Machines to pick a stock.

Adding the Best stock of the group

This
week I am adding to the 2015 Dividend Machine Portfolio the stock that I
consider to be the best stock of the seven I researched.That stock is Chevron, symbol CVX.

Chevron
has more earnings per share in relation to the dividend payout than any of the
other considerations.It is between the
52 week high of $135 and 52 week low of $100.

Yields
on the seven stocks I researched range between 3.51% at the low to 4.63% at the
high. Chevron comes in at 3.89%.Dividend growth ranges from 4.79% to 20%.
Chevron’s dividend growth rate is 11.47%.D/E ratios range from .15 to
1.13 and CVX is the .15.

Total
Return on CVX

Chevron
has been a Dividend Machine in every one of my portfolios so we have quite a
history for analysis.The table below
shows the dates I added CVX and the cost basis.

You
may notice that over time the gain has been minimal.Total return could have been better had I
added on dips and dips did occur, but once I pick a stock for a portfolio, I do
not add during that year.It makes data
analysis easier.Frankly, my personal
holdings where I am not constrained by the rules of TheMoneyMadam, are very similar to those in this blog.

When
you add in dividend income, total return improves to just over 10%.The first in purchases have a much better
total return than the last in purchases.See the table at left.

Additional
Income not included in Total Return

CVX
is volatile because it is affected by so many major world issues not limited to
oil and gas prices, regulations, political unrest in many of its
locations.As you can see from the
Total Return analysis above, you could have bought at the high and lost money
so CVX is not free of market valuation risk.

However,
we are income investors and the question is are we willing to risk some volatility
in principle to get reliable ever growing income?If
your answer is yes, what stock is o.k. to own even though its stock price may
suffer from externalities?

One
answer to this question is the opportunity for covered call income.CVX provides very nice covered call
opportunities.If you have confidence
in CVX you can add to your position every time it dips and sell calls to
capture immediate income.If your stock
is called away because the stock is moving up in price, you have pocketed the income and you still own your original
shares.

The
key point here is to add to your position because you trust CVX.Maybe your stock will not be called away because
the stock price sinks and you are stuck with another 100 shares of CVX at a
loss?The way I handle that situation
is to wait until I find the next call and bank the ever increasing dividend.An even better technique is to ladder your
covered calls.Look for a July $115, a
September $120 etc. Laddering calls can be a lot like laddering calls.

Some are skeptical of the dividend but I am hoping for an increase at their next announcement. Let's see.

Chevron
Dividend Machine Fundamentals:

I
will add Chevron as a 2015 Dividend Machine using the closing price on
Monday.CVX earned $10.14 during the
past four quarters and paid out $4.28.CVX closed at $109.87 on Friday, April 24.CVX pays a current quarterly dividend of
$1.07 for a forward yield of 3.8955%.Dividend
increases have averaged 11.47% over the past 5 years.D/E ratio is .15.

Although
the 2015 Dividend Machine Portfolio is heavy with energy stocks, Chevron is
still best in breed and the best stock of the seven stocks I researched.See the table below for a presentation of
CVX Dividend Machine Fundamentals.

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Covered Call Opportunities

Square, symbol SQ, is my current favorite stock that is not a dividend machine. To turn it into an income investment, I use SQ's volatiity to buy when it dips and sell calls. See the table above. Note that this call is not included in the post published on 12/12/18 M*

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TheMoneyMadam's Story

My income investing success came from my experience managing my and other people's money since 1993. Successful income investing requires discipline. In this blog I provide specific investments based on my principles of conservative income investing. I hope to help the thousands or even millions of people who have saved and want to invest their nest eggs to retire with income that grows. M* MoneyMadam

Disclaimer

Information on this blog does not constitute investment advice. Review or mention of any stock, bond, or other investment shall not be considered a buy or sell recommendation. Everything in this blog is the opinion of the author and no warranties are expressed or implied. M*MoneyMadam.